Understanding More about Business Formation: LLCs

Last month, we began discussing how even though budding entrepreneurs eager to make a mark in the business world are consumed by things like product development, sales projections and market share, it’s important not to put the cart before the horse.

In other words, we discussed how it’s important for them not to lose sight of the important matters that must be accomplished first in order to lay the foundation for future success. In particular, we examined how careful attention must be paid to how an organization will define itself in the eyes of the law — limited liability company, corporation, limited partnership, sole proprietorship and general partnership — as each entity has unique attributes.

In today’s post, our second in a series, we will continue our efforts of providing basic background information on each of these corporate structures in the aim of helping entrepreneurs make informed decisions.

Limited Liability Companies

Those looking to establish a limited liability company — or LLC — will be required to file articles of incorporation with the Secretary of State. The other crucial document that will need to be executed for the establishment of an LLC is what is known as an “operating agreement.”

This document sets forth everything from the profit-sharing expectations of members (i.e., those who own an interest in the LLC) to the authorities and rights of members, managers and employees. It’s worth noting that each member is vested with the authority to exercise management rights, but also have the authority to appoint managers — who might not be members — to exercise these management rights on their behalf, similar to the role played by officers found in corporations.

The defining characteristic of an LLC is, of course, that members cannot be held personally liable for its debts and obligations absent any personal guarantees. Indeed, the only thing at risk for members is their investment in the LLC.

As far as taxation is concerned, LLCs function as a sort of hybrid. That’s because if it has more than one member, IRS regulations dictate that it can be taxed as either a corporation or a partnership. In the former, double taxation is the rule, while in the latter, each member is taxed according to their share of the LLCs profits.

Please consider speaking with an experienced legal professional if you would like to learn more about organizing as an LLC or have any concerns about business formation.

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